Political Risk and Firm Exit: Evidence from the U.S.-China Trade War

Does international conflict induce foreign firms to “follow the flag” and exit from a profitable market? In this seminar, Samantha Vortherms of the University of California, Irvine, will discuss research conducted with Jack Jiakun Zhang that shows the U.S.-China trade war broadly elevated political risks for multinational corporations (MNCs) operating in China, increasing firm exit overall. However, investment treaties can mitigate political risks at the country level while firm entrenchment determines resilience to risk at the firm level. Using a new dataset on all foreign-invested firms registered in China between 2014 and 2019, Vortherms and Zhang implement interaction models to isolate the impact of increased political risks on MNC exit in the context of the U.S.-China trade war. Their findings show that U.S. firms were only very marginally more likely to exit China, suggesting that foreign direct investment outflows do not “follow the flag.” Instead, firm exit is determined by the balance of heightened political risks against the availability of firm-level and institutional resources to mitigate these risks.

This academic seminar is jointly sponsored by the Department of Government and the Initiative for U.S.-China Dialogue on Global Issues at Georgetown University.

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Samantha Vortherms is an assistant professor in the Department of Political Science at the University of California, Irvine. Her research examines how economic development impacts the relationship between individuals and the state. Her book project, Manipulating Citizenship in China, explains how economic development strategies in China’s cities create varying incentives for local governments to incorporate domestic migrants by extending them formal local citizenship. Dr. Vortherms’ work has recently been published in World Development, The China Quarterly, and Business and Politics and has been funded by the National Science Foundation, the Fulbright Hays program, and the Social Science Research Council.